The aim of this article is to provide an overview of the hedge fund global industry's development and the regulation dilemmas and issues it has triggered. Beginning in the US and then growing in the UK and continental Europe the hedge fund industry now manages more then USD 1 trillion of capital, increasing about 20-30% per year. Hedge funds usually are the buyers when others are sellers and the sellers when others are buyers. They will short-sell stocks and bonds and buy and sell more complex instruments such as distressed securities and other derivatives to hedge their risk. Hedge funds may also borrow money to leverage their investments, thereby increasing the level of risk. The hedge funds managers often use carry trade strategies to place their investment in different currency markets. Global investment banks act as prime brokers for the hedge fund managers, making money on them by clearing trades, loaning stock, providing leverage, carrying out research, marketing and providing other services. A substantial part of their profits nowadays is generated there.

Hedge funds, both individually and as an industry are able to switch strategies rapidly. The article brings a detailed scenario how the "crowding" strategy of some relatively small British hedge funds and American equity funds ousted in May 2005 the top management of the German exchange operator Deutsche Börse AG. They were famously dubbed as a "locusts capitals", by Franz Müntefering, then the President of the ruling Social Democratic Party. The wave of similar cases in Europe and in the USA, and the trend in more conventional fund managers to adopt hedge fund strategies brought an intensive debate among the regulators in the EU (and first of all in the UK), the US and changed the regulations which are appropriate for hedge funds as important players in the global financial markets.

Keywords: hedge fund, mutual fund, investment strategies, short-selling, carry trade, investment banks

  Jerzy J. Wajszczuk, Hedge funds on the global financial market - plik pdf; (142 KB)